It is quite easy to shift from fragile confidence to a downward spiral

By Alistair Osborne, City Correspondent and Peter Foster

12:01AM BST 28 Sep 2001

BRITISH consumer confidence has taken a knock from the terrorist attacks in America, but there is little sign yet of the sharp slowdown in our shops, pubs and restaurants that could trigger a recession.

Although package holiday companies, such as Airtours, have given warning that bookings may fall, the country's biggest retailers, including Marks & Spencer and the John Lewis Partnership, said yesterday that sales were holding up.

Roger Holmes, M&S's managing director of UK retail, said: "It is difficult to know what will happen, but the impact so far has not been that significant."

Like many retailers, M&S saw sales drop on the afternoon of the attacks and the following day, when the nation was glued to its television sets.

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Neither has John Lewis experienced any "rapid fall-off in sales". It remains on track to match last year's £150 million profits.

The importance of consumer spending to the health of British economy cannot be overstated. As Deutsche Bank's UK economist, George Buckley, points out, it accounts for about 70 per cent of all expenditure.

Business leaders and economists say the biggest threat to consumer confidence is rising unemployment, with some privately worried about the impact of recent job lay-offs, such as the 5,200 from British Airways.

If unemployment begins to rise sharply from its current 26-year low of 3.1 per cent, spending will slow and the risk of a recession will markedly increase.

That is partly why many economists are forecasting another cut in interest rates next week. Sixteen out of 25 surveyed by Reuters believe a quarter point cut will come next Thursday, lowering the rate to 4.5 per cent.

The boss of one of Britain's biggest fashion chains said: "The thing that will drive a recession is unemployment, which is why I think there will be more interest rate cuts."

Cuts should help consumer confidence. "Clothes have never been cheaper," he said, "and if you're not flying, there's nothing else to do but go out to eat and go shopping."

Businesses are caught in a guessing-game waiting to see whether consumer confidence can keep Britain out of recession.

Alastair Eperon, deputy chairman of the British Retail Consortium and head of corporate affairs at Boots, said: "It's very patchy. There's been some effect on retailers like Selfridges and Harvey Nichols, hit by fewer tourists, but others are holding up well."

He warned, however: "There's a general sense that consumer confidence is very fragile. There is a concern about the general impact on confidence of some of the rhetoric around. People envisage some sort of war-like situation and are frightened.

"What I am keen to avoid, and [what] ministers understand, is that it is quite easy to shift from fragile confidence to a downward spiral."

It was the strong growth in consumer spending that deterred the Bank of England from cutting interest rates as deeply as the other major central banks in the wake of the attacks. It opted for a quarter point cut rather than the half a percentage point favoured by its US and European counterparts.

The latest surveys of consumer confidence from GfK Great Britain, on behalf of the European Commission, and the pollster Mori, contain conflicting data. GfK found that confidence had slipped for the third consecutive month in September but was still stronger than 12 months ago.

However, Mori's poll of 1,011 adults across Britain between Sept 20 and 25 found the lowest levels of confidence about the economy for more than 20 years. While the International Monetary Fund said recession in America was a "done deal", Tony Blair appeared to talk up Britain's prospects yesterday.

He said: "The actual objective fundamentals of the economy have not altered, and provided we approach this in the right way we will get through this.

"This is a matter of confidence as much as anything else and there really is no reason why we cannot carry on and be confident in the basic strength of our economy."